Sources and Problems of Human Capital Formation

Human Capital Formation

Knowledge has played a significant role in the development of mankind. Education, learning, and training can be gained and spread through various means like music, books, movies, lectures, etc. It has already been proved that the businesses initiated by the educated and skilled individuals are always more productive than that started by the unskilled person. Therefore, the income earned by the skilled person is more than that of the unskilled person. Similarly, the contribution to the nation’s economy is more from the skilled person than that from the latter.

Sources of Human Capital Formation

Education investment is recognised as one of the main sources of human capital along with other sources like health, migration, on-job training, and information. Let us decode it one by one.

Quick link: Impact of Human Capital on Economic Growth

Investment in Education

The most powerful way to improve and expand the fruitful workforce in the state is by nourishing and building up the education system. It is acknowledged as the root of human capital formation, that is the reason why the parents and also the government spend more on education. Few objectives why individual and state investment is more in education are:

  • To develop their future income
  • To build manpower and enhance their technical skills, to improve workers productivity, hence resulting in economic growth
  • To control the population growth rate by reducing the birth rate and making maximum resources available per person.
  • Knowledge and education can be transferred to others, resulting in social advantages

Investment in Health

The second major source of human capital formation is the health sector. A person who is unwell will absolutely influence productivity. Few health-related investments are: providing clean and safe drinking water, therapeutic medicines, etc.


An individual, to get higher salaries, good jobs, migrate from their native place to another place. In India, unemployment is the reason for rural-urban migration. Other skilled and qualified individuals like doctors, engineers, etc., migrate from one country to another in search of better opportunities.

In both the situations, migration involves transportation cost, cost of living in the migrated place, etc.

The increased incomes in the new place exceed the values of migration. Therefore, investment in migration is another source of human capital formation.

On-the-job Training-

To increase the labour productivity, many companies provide on-job training. This source of income is expensive, and companies bear huge expenses for providing on-job training. Examples: in-house training, training under a skilled supervisor, and off-campus training.

Investment in Information: All the detailed information

Information associated with education and health can be achieved by spending money. For example, data concerning salaries are prepared for different markets.

Also, Explore:

Problems of Human Capital Formation

Growth in population: The rapid rise of the population can influence the grade of human capital formation, mostly in developing countries. It degrades the per capita availability of the present facility. A large population involves extra investments.

Long process: The method applied for human development is a long term process because skill enhancement requires extra time. Therefore, the process becomes very normally slow.

Gender inequality and high regional disparity: These two factors affect the human development skill.

Insufficient on-job training: In the agriculture sector, on-job training to handle advanced equipment is not provided to the worker.

High poverty level: In India, a large portion of the population is below the poverty line. Therefore, they do not have easy access to primary health and education.

Solved Questions

Q.1. What are the determinants or sources of human capital formation?


What factors contribute to human capital formation? (NCERT)

(1) Expenditure on education ●     It is the most effective way of increasing the productive workforce in the country.

●     Education helps in living a standard and healthy life.

●     It increases the person’s ability to earn.

(2) Expenditure on health ●     It is very important to carry out expenditure on health and education simultaneously.

●     A healthy person is more efficient and productive.

●     It brings out the best of skills in human beings.

(3) Training ●     It helps the workers to increase their skills and productivity.

●     It also helps in the growth of the economy.

●     Example: Pradhan Mantri Kaushal Vikas Yojana enables Indian youth population to take up industry related skill training. This training helped them to secure a better livelihood.

(4) Migration ●     People migrate from one place to another in search of jobs with higher income prospects.

●     Unemployed people from rural areas migrate to urban areas in search of jobs.

●     Technically qualified persons (like engineers, doctors, etc.) migrate to other countries because of higher salaries that they may get in such countries.

●     Migration in both these cases involves two kinds of cost: cost of transportation from one place to another, the higher cost of living in migrated places.

1.    Expenditure on migration is a source of human capital formation as enhanced earnings in the migrated place is more than the increase in costs due to migration.

2.    This leads to capital formation through fuller utilisation of skills.

(5) Expenditure on information ●     Expenditure on acquiring all sorts of information regarding labour markets, education, health, etc., also becomes an important source of capital formation.


Important Topics in Economics:


Q.2. What are the problems of human capital formation in India?
Answer: The main problems of human capital formation in India are:
(1) Rising population ●     The rising population adversely affects the quality of human capital.

●     It reduces the per capita availability of existing facilities.

(2) High regional and gender inequality ●     Regional and gender inequality lowers the human development level.
(3) Brain drain ●     ‘Brain drain’ is the migration of highly skilled labour.

●     It adversely affects economic development.

(4) High poverty level ●     A large portion of the population lives below the poverty line.

●     Due to the low level of income, they cannot afford higher and quality education or expensive medical facilities.


Q.3. Mention two government organisations that regulate the health sector. (NCERT)
Regulatory authority in health ●     Ministries of Health at the union and state level

●     Indian Council for Medical Research (ICMR)


Q.4. Mention two government organisations that regulate the education sector. (NCERT)
Regulatory authority in education ●     Ministries of Education at the union and state level

●     National Council of Educational Research and Training (NCERT)

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